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Ship owners are aswim in profits and primed to spend

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When steel producers are bullish on the strength of a given market segment, customers typically run for cover, knowing that producer optimism means higher prices for steel. Often times, customers are unwilling to pay those high prices.

Today's shipbuilding market doesn't fit into that category.There is a great need for vessels, and ship owners are placing orders at high levels. Even rapidly rising steel costs haven't dimmed their enthusiasm. Orders are being placed even though plate prices in the United States have risen to more than $1,400 per ton, up more than 100 percent this year.

"Driving all the new building orders is a super-strong dry cargo freight market for the last four years," said Matthew I. DeLuca Jr., chairman and chief executive officer of Mid-Ship Group LLC, a Port Washington, N.Y.-based ship broker and supply chain manager. "Most people involved in the segment—charterers, owners and brokers—believe that with the rapidly expanding middle class in China, India and Brazil, the market is expanding and demand is increasing dramatically.

"Most of the ship owners made a tremendous amount of money over the last couple of years, so they are not hesitant to order new vessels even though prices for them are historically high," DeLuca said.

"The fleet is aging, so this is the perfect time to renew the fleet and sell off the old ships," he added. "Having said that, there are a number of people wanting to become ship owners who will purchase older, second-hand vessels in an attempt to capitalize on the strong freight market while it lasts."

There are numerous examples of ship owners trying to expand their fleets both for dry cargo and tanker ships. Maersk Line Ltd., Norfolk, Va., recently purchased two U.S.-flag general cargo and roll-on/roll-off combination ships formerly under charter to the U.S. Navy's Military Sealift Command (MSC), according to Marine Log magazine. Both ships originally were built in Denmark, converted by the former Bethlehem Steel Corp. and re-flagged for MSC services.

Most global shipbuilding is done outside the United States, with South Korea home to the world's most active shipyards, another buyer source said. Other Asian nations, notably Japan and China, also are very active, he added.

"I think what you have over there is a lot of demand for products from those countries as they are growing," he said. "They need steel raw materials and there just aren't enough ships to bring in what they need, so it's a good business to be in right now. The way they are growing, it will be good for a long time."

The energy market is another factor contributing to shipyard activity. Aker Philadelphia Shipyard Inc., a leading U.S. commercial shipyard, recently launched Hull 009, the fifth in a series of 12 product tankers slated to be completed in the yard in 2011 for American Shipping Co., formerly Aker American Shipping Inc., Philadelphia.

"American Shipping is committed to having the newest, most-modern and most-efficient vessels in our fleet," said Rob Kurz, American Shipping's president and chief executive officer. "As our build program with Aker Philadelphia Shipyard progresses, each vessel incorporates improvements over the previous vessels."

DeLuca said high prices for steel haven't impacted demand. "In fact, just the opposite," he said. "The shipbuilders can't keep up with demand. On older contracts, some of the less-than-first-class shipyards are trying to renegotiate the price of ships to offset the soaring price of steel plate. Needless to say, owners are refusing, which is leading to lawsuits and arbitrations and cancellations of orders of some ships."

But for the most part, DeLuca is bullish on the market. "A number of steel companies are recognizing the super-high cost of ocean freight and are electing to buy their own ships, primarily Capes to carry iron ore," he said.

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